Is Detroit Really Bankrupt?

August 23, 2013

The two pension funds that represent Detroit's city workers and retirees are challenging the way the city's emergency manager has calculated their unfunded liabilities, leading to a possible showdown in federal bankruptcy court over whether the city's financial position is as dire as state officials are claiming, says the Wall Street Journal.

The two funds have long maintained they were relatively well-funded using accepted actuarial projections. But the city, under the control of emergency manager Kevyn Orr, in July argued that the projected shortfall of the funds is at least $3.5 billion, more than five times previous estimates.

Now, as pensions, unions and residents rushed to meet a Monday deadline to oppose the Chapter 9 bankruptcy proceedings (the largest-ever municipal filing) the pensions are saying the emergency manager relied on a report that used overly conservative assumptions on the returns the funds earn on their investments, which led to the ballooning of their projected shortfall. The reports on the funds representing the uniformed and non-uniformed workers were commissioned by the city in its preparation for the July bankruptcy filing.

While pension shortfalls are only part of the city's $18 billion in estimated liabilities, any challenge to the city's calculations could give ammunition to those who question if Orr moved too quickly to seek bankruptcy protection for the city at the behest of Gov. Rick Snyder, who has insisted that Detroit is insolvent.

A trial on whether Detroit is eligible for bankruptcy protection is scheduled for October 23.

The funds and others argued in their filings that cutting benefits earned by the city's employees and retirees would violate the state constitution.

Some filings challenging the bankruptcy question how cash-strapped Detroit is.

Bill Nowling, a spokesman for Orr, said the federal bankruptcy case would trump any state constitutional protection for public pensions, adding that an exhaustive report by Orr, who was appointed by Snyder in March, found that the city has been running out of cash for years with no options left to pay billions in debt.